Problem
Consider an economy where the income tax brackets are as follows: • Earned income up to $20,000: τ = 0 • Earned income above $20,000: τ = .50 Consider a married worker who files singly (that is, pays taxes based only on their own income). This worker's utility over consumption and labor is given by U(c,h) = 20c1 2 -h This work can supply labor at a wage of w = 10.
i. What will this worker's labor supply and earned income be?
ii. How much tax will this worker pay?
Suppose this worker's spouse supplies labor inelasticly and has pre- tax earnings of $50,000.
i. If this worker instead filed taxes jointly - with taxes paid based on household income - what will the worker's new labor supply be?
ii. Use this result to discuss the finding that the elasticity of labor supply for secondary earner spouses is much higher than that of primary earners.
iii. What is the "marriage penalty" this household will pay if they choose to file jointly?